Oil drops, prices climb!

Energy – The price of a barrel of oil is a third of what it was less than six months ago. The user hardly sees a difference. Instead, the State and businesses in the industry are profiting off it. The situation demystified.

Today 50 dollars; perhaps even less in the coming weeks. The price of a barrel of oil has collapsed. Last July, after several months of galloping inflation, it had reached the historical peak of 150 dollars. This level was, in the words of the industry and the government, solely to blame for the equally dizzying rise in the price of fuel at the pump and of gas. Curiously, the fall in the price of oil has not led to a proportional drop in the price of premium and diesel. As for gas, not only is it not dropping, but the gas sector industries want a new increase!

When the State and the oilmen soak up buying power

While the price of a barrel of oil has fallen by two-thirds since last July’s peak, the price of fuels has only fallen about 20%. The average sale price a liter of 95-octane went from €1.49 (US$1.92) in July to €1.15 (US$1.48) at the beginning of November. During the same period, the price of diesel went from €1.44 (US$1.85) to €1.20 (US$1.55). Have the oilmen really passed along the fall in the price of crude? “Yes” is the unhesitating response of Christine Lagarde, Minister of Economy and Finance who, last September, declared herself ‘satisfied’ with the oilmen’s intentions. These same oilmen are attempting to minimize their responsibility, claiming that their margin is no more than €.02 (US$.03 per liter of fuel. Nonetheless, despite its “weakness”, it allowed them to draw colossal benefits. So, in the third quarter, Total raked in €4 billion (US$5.16 billion). In short, the oilmen are behind the high price of diesel, yet it’s taxed at a lower rate than unleaded. The inadequacy of their investments has in fact led to a rise in the costs of refining, which represents €0.15 (US$0.21) per liter as compared to less than a eurocent for 95-octane.

To explain the discrepancy between the extent of the fall of ‘black gold’ and that of fuels, the oilmen emphasize the fact that the price of crude represents only a part of the final price the customer pays. So, for a liter of 95 unleaded purchased for €1.15 (US$1.48) at the pump, the part represented by the price of a barrel is €0.25 (US$0.32). Distribution and refining costs are around €0.10 (US$0.13). The remaining €0.75 (US$1.03) (sic) correspond to the total amount of domestic petroleum products tax (TIPP) and the VAT. To lower the price of fuel significantly, the level of imposition must be reduced. No one is proposing decreasing or abolishing the TIPP, which contributes to the financing of the transport and sociopolitical infrastructures of the départements. This tax is in fact adjusted on the total consumption of fuel. The more it falls, the more the TIPP rates are reduced. On the other hand, numerous unions, consumer associations, and left parties like the PCF, demand the abolition of the VAT or, failing that, a reduction in the rate. This tax is in fact particularly unjust since it is based on consumption and not on revenues. Lastly, its calculation partially integrates the TIPP. In other words: with the VAT, the government taxes its taxes.

It’s a real gas for shareholders

Between 45.37% and 68.52% - that’s the margin within which the price of gas has risen, according to its use, since 2005. According to Gaz de France and the government, this rise is due to the rise in the price of a barrel of oil, which the prices of gas are indexed to. The State and the business will content themselves with passing along the sudden rise in the price of ‘black gold’. And that insufficiently, to listen to Gérard Mestrallet, CEO of GDF-Suez, who’s asking for a new increase on the grounds of a loss of earnings of more than a billion euros (US$1.29 billion). This argument convinced neither the consumer associations nor the unions. CGT Energy, which demands a decrease in the regulated rates based on a drop in the price of crude, maintains that the rate inflation of the past few years feed above all the dividends of GDF-Suez stockholders. In 2007, for the third consecutive year, gross trading profits increased more than 10% while net earnings reached 2.5 billion euros (US$3.2 billion). In spite of the “weakness” of the regulated rates, the gross surplus of buying activity and energy sales has doubled, reaching 1.075 billion euros (US$1.38 billion).

Are the users financing the Electricity Board’s financial growth?

In the last few years the price of electricity has risen more modestly than those of gas and oil. The increases have, on the whole, remained within the limits of inflation. For 2008, the French Electricity Board (EDF) wants to get a new increase. According to the state-owned company, it is a question of releasing means to finance investments. Up to now, while no one is opposed out of hand to the principle of a reevaluation of electricity rates, the investment policy of the EDF is questionable. While investment in renovation and increasing productive capacity is insufficient, the group is multiplying its acquisitions in order to become a key actor in the European and worldwide electricity markets. Last September it announced the buyout of British Energy for €15.6 billion (US$20 billion). Yesterday, also, it said it was prepared to pay out $4.5 billion for the buyout of the American company Constellation Energy.